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SBA Requires At Least Two Methods of Valuation in Appraisal Reports

Jun 2011

The Small Business Administration (SBA) is seeing a growing trend in appraisals for 504 loans whereby one valuation methodology is provided despite the current economic environment. For credit reasons, the SBA requires at least two methods of valuation in an appraisal report.

Rarely will the SBA accept an appraisal using only one method of evaluation, regardless of the appraiser's reasoning for omitting other methods. The SBA is not looking for an appraiser to explain why only one approach meets Uniform Standards of Professional Appraisal Practice (USPAP) guidelines. It requires at least two valuation methodologies for credit reasons and is being consistent with common banking practices, especially in light of current market conditions.

Typically, three approaches are used by appraisers in the estimation of market value. These three approaches provide data from three market perspectives: the cost approach, the sales comparison approach and the income approach. Altair Appraisal Group, Inc. provided the following description of each approach.

The Cost Approach is the sum of the land value and the cost of the new improvements less accrued depreciation. This approach is based on the premise than an informed investor/purchaser would pay no more for an existing property than it would cost him or her to reproduce a substitute property with the same utility without undue delay.

The Sales Comparison Approach is the process for comparing prices paid for properties having a satisfactory degree of similarity to the subject property and adjusted for differences such as time, location and physical characteristics. This approach is based upon the principal of substitution, which implies that a prudent purchaser will not pay more to buy a property than it would cost him or her to buy a comparable substitute property in a similar location.

The Income Approach is based on the premise that a prudent investor would pay no more for the subject property than he or she would for another investment with similar risk and return characteristics. The value of an investment can be considered equal to the present value of future cash flows generated by the property. This amount is capitalized at a rate which should reflect risk to the investor and the amount of income necessary to support debt service.

When ordering an appraisal for a 504 loan, the best recommendation is to ensure at least two valuation methodologies are used in the appraisal report.

For more information about 504 loans in Florida, contact Florida First Capital by visitingwww.ffcfc.com, emailing atinsider@ffcfc.comor calling 888.320.5504.